If you’re like most, you’re not going to read them, so here’s the basic 30 second summary.

GRVY was a net net ADR stock trading. It’s NNWC was below the share price and with an upcoming huge release of their #1 game. Due to constant delays and server issues spanning several years (!), their value kept dropping. It was a wild ride. Up 50% one year, down 50% the next.

Being Korean, I did have the edge where I could access people, data and forums about game status, consensus and what management were saying that wasn’t getting published in English.

At the end, closed out the position at a loss. It was a disappointing end to the investment.

Gravity in 2017

First, Gravity is a real company in case you’re wondering.

It’s not a shell, it’s not a cash box.

2016 was a great year for the company.

In 2016, our revenues increased by 44.1% to Won 51,396 million (US$42,698 thousand) from Won 35,660 million in 2015. In 2015, our revenues decreased by 10.6% to Won 35,660 million from Won 39,889 million in 2014. We recorded a net income attributable to parent company of Won 250 million (US$207 thousand) in 2016 as compared to a net loss attributable to parent company of 16,965 million in 2015 and a net loss attributable to parent company of Won 20,907 million in 2014. Our gross profit margin increased to 41.6% in 2016 from 15.1% in 2015, which had been an increase from 14.3% in 2014. Our operating margin was 6.7% in 2016 due to an operating income of Won 3,423 million (US$2,843 thousand) in 2016 as compared to operating margins of negative 48.3% in 2015 and negative 29.7% in 2014. – 2016 annual report

Looks like 2014/2015 was the low point with a rebound in 2016, but still below 2009 and 2010 levels of 60% margins. Especially for a software company.

The latest quarterly report has some mixed results.

Revenue in the quarter is up 51% compared to last year, but operating income is down, EBIT is a tiny 2.8% increase and net income is down 12.7%.

Most of the revenue was driven by relaunches of the game as well launching a new mobile version.

Ragnarok M, an MMORPG mobile game

The Company launched Ragnarok M in Taiwan, Hong Kong and Macau on October 12, 2017. Based on revenues, Ragnarok M ranked as first in both Apple’s App Store and Google Play Store in Taiwan, Hong Kong and Macau, at its peak. The Company plans to launch Ragnarok M in Korea during the first quarter of 2018 and in Thailand during the first half of 2018.

· RO: Idle Poring, a text RPG mobile game

On September 13, 2017, Gravity commenced global service of RO: Idle Poring, except for Korea, Japan and China. Based on revenues, RO: Idle Poring ranked in the top 10 mobile games in 12 countries on Apple’s App Store and in 7 countries on Google Play Store, it its peak. RO: Idle Poringwas initially launched in China on April 28, 2017 by X.D. Network Inc. (“XD”). Such game is expected to be launched in Korea and the launch schedule is to be announced in the future.

Considering how under the radar this company is, it’s very interesting to see this sort of correlation between the successful launch of a game, as well as the release of the Q3 report. Somebody must have been waiting and watching.

At any rate, for the first time since 2008, Gravity has tailwinds.

Is Gravity Really Worth $80?

Compared to when I first analyzed it as a net net, the price has made GRVY into a different story. It’s no longer the net net I saw.

NVAC of $4.58, NNWC of $3.71 – source: old school value analyzer spreadsheet

Using some estimates and crude projections, here’s what an earnings valuation using Graham’s model and EBIT model shows.

In the screenshot above, I’ve done the same extrapolation with revenue. A straight line fit is around 85M by the end of Q4.

I’ve chosen 15% operating margin as it’s the level the current stock price is based on.

EV/EBIT multiple of 22x was chosen as the norm by comparing with other game companies.

I’ve classified the off balance sheet as $39.4M, but it should really be $34M. It’s the non-controlling equity portion owned by Gungho Online.

I’m not an analyst that follows GRVY and checks their numbers, but I’m surprised to see the stock price closely matches my short term projections.

But with essentially 0% margin of safety and no record of success exceeding 2 years, Gravity is not a company I’ll be betting on any time soon.

Was I Wrong?

When you see something like this, you can’t but question whether you made a mistake.

I sold 4 years ago, and looking at my decisions then with the information I had on hand, I still stand by my choice that it was the right decision.

You can see from the financial statements in the first image that the company wasn’t getting its act together. When I sold, the value of cash exceeded the stock price.

In hindsight, it took them another 4-5 years to get things sorted out.

The main lesson I do get from this is that, even small companies take a while to turn it around. I tend to think that 2-3 years is enough for small companies, but Gravity showed that it’s much longer than that.

Do I regret selling?

No.

Do I wish I would have held?

Of course. Who wouldn’t. But stock prices are not fair values. It’s just a trading value.

Disclosure

No positions.

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